General Electric: The Alstom Acquisition Appears To Be On Shaky Ground

Summary

General Electric has offered to buy Alstom for as much as $13 billion, funded by the company's large overseas cash position.

This transaction would give General Electric increased access to the European power plant equipment and locomotive market.

In addition, it would further General Electric's long-term goal of becoming a predominantly industrial company.

However, completing the transaction may prove to be tricky, as the French government wants to keep the company in French hands.

According to Bloomberg, General Electric (NYSE:GE) is trying to buy Alstom SA (OTCPK:ALSMY), a French maker of power plants and trains, for $13 billion. However, this proposed transaction has faced several hurdles, including antitrust concerns and French protectionism.

Why Alstom is a great fit for General Electric

In my recent article, I argued that Alstom was a good acquisition target for General Electric. Alstom is already a highly profitable outfit. For fiscal 2013, it generated about €1.189 billion ($1.65 billion U.S.) in EBIT, €802 million ($1109.65 million U.S.) in net income, and €408 million ($564.51 million U.S.) in FCF.

The company would be paying a 25% premium to recent prices. However, given that shares of Alstom were down 20% y/y, this is hardly expensive. Furthermore, it would give General Electric a use for its $57 billion in overseas cash.

What really makes sense for General Electric are the power plant assets. Alstom is the world leader in turbines for dams and other hydro projects. It is also a competent maker of gas and wind turbines. In addition, Alstom's R&D in smart grids should help General Electric's ailing power management segment, which has been struggling to gain traction.

Adding Alstom's assets to the fold would increase General Electric's European exposure. With the continent now slowly recovering from its five-year recession, this seems like the perfect opportunity to go long Europe.

Will French pride get in the way?

However, the French government may stand in the way of General Electric. According to Bloomberg, in 2005, France's government passed an anti-takeover decree, where it can intervene to protect companies from being acquired if it deems them to be of national importance. This legislation was passed in response to speculation that PepsiCo Inc. (NYSE:PEP) was planning a bid for Danone.

According to a WSJ report, French economic minister Arnaud Montebourg is working with the company on an alternative to an outright sale of all of Alstom. Instead, talks are being held on a sale of just the power plant and energy assets to General Electric.

Indeed, General Electric may only want to acquire Alstom's energy business, as Alstom's high-speed TGV trains are often seen as a symbol of France itself. The French government clearly wants to keep at least some portion of Alstom in French hands, with Mr. Montebourg referring to the company as "...the symbol of French industrial strength and know-how." Furthermore, the French government has concerns regarding losing jobs and the possible closing of industrial plants. Alstom is already in the middle of a large turnaround. The company is cutting 1,300 jobs in order to save up to 1.5 billion euros by April 2016.

Conclusion

General Electric needs to tread carefully here. On the one hand, Alstom's assets are clearly very valuable and would serve to enhance surging industrial segments. On the other hand, General Electric needs to make sure it offers the French a palpable deal, or risk losing out on Alstom entirely.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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